What’s that about cooler heads prevail? Keeping perspective can be a commodity when market volatility spikes. Sometimes that’s easier said than done though, especially after what we’ve seen recently.

But here’s the thing: Equity indexes don’t give an all-inclusive look into the broader economic picture. They’re made up of select components (the Dow only has 30 stocks). Also, stock prices (and traders) can be a bit, well, moody. There’s a reason why economist Eugene Fama likened them to a random walk.1

For a more targeted look, keeping tabs on economic indicators can help determine if the wild swings we’ve seen suggest underlying weakness in the economy, or are simply natural market moves born from healthy caution and profit-taking. So here’s a quick status check on some of the more prominent indicators after a big data week.

Sources: The Bureau of Labor Statistics, Census Bureau, Bureau of Economic Analysis, and The Conference Board

Gross domestic product (GDP)

Perhaps the most well-known indicator of “how well things are going,” GDP, or the measure of the total dollar value of all goods and services produced, suggests the economy is accelerating. After years of tepid, post-crisis growth, GDP increased meaningfully in 2017.

Latest reading: Economic growth slowed to 2.6% in Q4 2017 from 3.2% in Q3 and 3.1% in Q2 as imports, which subtract from GDP, surged. But for 2017, GDP grew 2.3%, up from 1.5% in 2016.6

Consumer Price Index (CPI)

The CPI measures what consumers pay for a basket of goods and services. The inflation rate of those prices has been so low for so long that it appears hints of an uptick may be having an outsized effect on the market. Adding to the sensitivity may be the Federal Reserve’s interest rate plans, i.e., the higher the fed funds rates, the more banks charge consumers for everything from credit cards to mortgages.

Latest reading: Consumer prices rose by more than projected in January. Core CPI, which excludes food and energy prices due to their volatility, rose 0.3%, above consensus forecasts for a 0.2% increase. From a year ago, CPI was up 1.8% , higher than the 1.7% expected.2

Producer Price Index (PPI)

On the business side of the inflation equation, PPI measures the cost of goods that businesses purchase and sell at wholesale prior to their retail markup. If PPI is on an upward trend, higher costs of doing business may eventually be passed along to consumers.

Latest reading: The producer price increased 0.4% in January, accelerating amid strong gains in the cost of gasoline and health care. In the 12 months through January, PPI rose 2.7%, following its 2.6% rise in December.3

Retail sales

How much people are spending, or not spending, is an important gauge in a consumer-driven economy. Market watchers typically hone in on retail sales reports as important predictors of inflationary pressures.

Latest reading: Data indicated consumers were opening their wallets toward the end of last year, as retail sales recorded a 3.8% annualized increase in Q4. However, that momentum slowed in January. Advance estimates of US retail and food services, adjusted for seasonal variation, fell 0.3% from December 2017. Year over year, sales were up 3.6% 2017.4

Nonfarm payroll

Of course, income streams factor into consumers’ confidence and purchasing habits. And there appears to be strength in the labor market for the roughly 80% of the workers who contribute to the country’s gross domestic product. That strength may have actually contributed to the recent volatility, in that wage growth could help drive an uptick in inflation.

Latest reading: Total nonfarm payroll employment increased by 200,000 in January, and the unemployment rate remained at a low 4.1%. Employment continued to trend up in construction, food services and drinking places, health care, and manufacturing.5

Paint by numbers

Similar to isolated bouts of volatility in the stock market, a single data release does not a trend make. For investors in search of broader context, tools that combine a wide swath of economic data can be useful. One such tool, the Conference Board Leading Economic Index®, compiles 10 key metrics into a composite average to forecast future economic activity. Its latest reading suggests the continuation of strong economic growth in the first half of the year.7

Following a lengthy stretch of historically low volatility, Wall Street seems zeroed in on indicators even more so than usual. It will welcome anything that provides clues about the market’s direction. Thus far, the numbers appear to show that fundamentals remain positive.

And amid zig-zagging stocks, that supports the case for investors taking a step back and assessing the bigger picture when it starts to feel a little hot under the collar.

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1. Fama, Eugene F. “Random Walks in Stock Market Prices,” Graduate School of Business University of Chicago. https://www.chicagobooth.edu/~/media/34F68FFD9CC04EF1A76901F6C61C0A76.PDF

The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 companies and then dividing that total by an adjusted value—one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities.

The Conference Board Leading Economic Index® (LEI) is a key element in an analytic system designed to signal peaks and troughs in the business cycle. It is constructed to summarize and reveal common turning point patterns in economic data. The LEI’s 10 components are average weekly hours, manufacturing; average weekly initial claims for unemployment insurance; manufacturers’ new orders, consumer goods and materials; the ISM® Index of New Orders; manufacturers' new orders, nondefense capital goods excluding aircraft orders; building permits, new private housing units; stock prices, 500 common stocks; the Leading Credit Index™; the interest rate spread, 10-year Treasury bonds less federal funds; and average consumer expectations for business conditions.

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